Tuesday, 16 October 2012

What goes around comes around

There was a curious piece in the New York Times business section Friday [no link: paywall] entitled ‘Drawing back a curtain on a Mexican tycoon’. It was full of broad hints about how creepy, mysterious, inaccessible and probably fundamentally dishonest people who fit into that category might be. And maybe the deal-makers and Masters of the Universe in Mexico operate differently from their counterparts here—I wouldn’t know. Yet, if our home-grown versions are not cut from a similar mold, there is plenty of evidence that they soon will be. Mexico, looking more and more like a failing narco-state, is showing us how bad things can get. Oh and incidentally, it’s right next door.

The story, a deceptively simple, even superficial one, is about the battle between one David Martínez (‘Mexican tycoon’) and a local boy, Paul Singer, hedge fundmeister and major Republican moneybags [below].

The two titans are battling over the aftermath of a bankruptcy involving the Mexican glassmaking firm Vitro. Singer’s outfit had bought a bunch of the companies bonds, thus is a creditor interested in picking up some of the pieces. So far, easy enough to understand.

The way bankruptcy is supposed to work, at least in my simple Econ 101 notions, is that anyone holding equity in the company in the form of shares loses the investment, given that you bought them figuring that the company was worth something and would make a profit, thereby causing your shares to pay dividends and increase in value. If you goofed, too bad; the stock tanks. You lost. If it goes bankrupt, you get bupkis.

Bondholders, on the other hand, do not buy into the company nor assume anything about its future profits other than that it can and will pay back the borrowed capital from its operations. The distinction is important because the risks involved to investors (individuals or things like pension funds) in parting with their money in these two different ways are based on entirely different assumptions and time-frames. The gamble on a stock pick (equity) that a risk-taking wealth manager might find attractive would not be prudent for Grandma who needs a guaranteed income (bonds) to pay her gardener and buy her arthritis medicine and would go for conservative corporate bonds paying a fixed coupon.

That’s the theory, anyway. What Martínez’s friends at Vitro did, however, was turn all that upside down, and through some blatantly fraudulent—but perhaps not illegal—footwork, stiffed the bondholders and allowed the company’s owners, i.e., the shareholders, to retain the company’s remaining value as if nothing had happened. In short, they saddled the guys who loaned them money with the bankruptcy losses and kept the assets for themselves.

Sounds rather like theft, actually. What’s interesting is that that is exactly what the big banks and insurance companies did to us with the bailout of 2008-9 as has been detailed in the economics and finance blogs since Day One. The Lloyd Blankfeins, John Thains and, yes, even the Jamie Dimons ran their companies into the ground and should have been bounced out on the street covering their behinds with both hands. Stock in Merrill Lynch and Citibank should have been used for toilet paper while the bondholders lined up to see what could be salvaged from the wreckage and how many pennies on the dollar they could recover.

The Fed could have created a national ‘bad bank’ to dismantle these failed behemoths while guaranteeing deposits, exactly as was done in Sweden during their financial panic of the early 1990s. The guilty would have been punished, the TBTF monsters brought low, and we citizens would have accepted the shared suffering that ensued with grumbling but an underlying sense that, despite the debacle, justice was sort of done.

Instead, we got the worst sort of ‘moral hazard’ imaginable in which the perpetrators of the financial crimes got off scot-free and now trumpet openly their intention to do everything just as before only moreso while screwing the powerless with greater glee, most notoriously through the fraudulent foreclosures that are now epidemic from sea to shining sea.

So Mr. Singer can complain all he wants, but the face of that corrupt Mexican judge letting his buddy-boys in the Aztec banker ionosphere get away with mega-pilfering is just as contemptuous and sneering as any on display here. It’s the mirror image of what we brought down on ourselves with the Bush-Obama fix, and it is the unlovely visage of our collective future.